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April 11, 2012

How We Spend Nearly $1 Trillion a Year Fighting Poverty—and Fail
by Michael Tanner

The American Welfare State

Executive Summary
News that the poverty rate has risen to 15.1 percent of Americans, the highest level in nearly a decade, has set off a predictable round of calls for increased government spending on social welfare programs. Yet this year the federal government will spend more than $668 billion on at least 126 different programs to fight poverty. And that does not even begin to count welfare spending by state and local governments, which adds $284 billion to that figure. In total, the United States spends nearly $1 trillion every year to fight poverty. That amounts to $20,610 for every poor person in America, or $61,830 per poor family of three. Welfare spending increased significantly under President George W. Bush and has exploded under President Barack Obama. In fact, since President Obama took office, federal welfare spending has increased by 41 percent, more than $193 billion per year. Despite this government largess, more than 46 million Americans continue to live in poverty. Despite nearly $15 trillion in total welfare spending since Lyndon Johnson declared war on poverty in 1964, the poverty rate is perilously close to where we began more than 40 years ago. Clearly we are doing something wrong. Throwing money at the problem has neither reduced poverty nor made the poor self-sufficient. It is time to reevaluate our approach to fighting poverty. We should focus less on making poverty more comfortable and more on creating the prosperity that will get people out of poverty.

Michael Tanner is director of health and welfare studies at the Cato Institute and author of The Poverty of Welfare: Helping Others in Civil Society.

Federal welfare spending alone totals more than $14,848 for every poor man, woman, and child in this country.

Introduction
On January 8, 1964, President Lyndon B. Johnson delivered a State of the Union address to Congress in which he declared an “unconditional war on poverty in America.” At the time, the poverty rate in America was around 19 percent and falling rapidly. This year, it is reported that the poverty rate is expected to be roughly 15.1 percent and climbing. Between then and now, the federal government spent roughly $12 trillion fighting poverty, and state and local governments added another $3 trillion. Yet the poverty rate never fell below 10.5 percent and is now at the highest level in nearly a decade. Clearly, we have been doing something wrong. When most Americans think of welfare, they think of the cash benefit program known as Temporary Assistance to Needy Families (TANF), formerly known as Aid to Families with Dependent Children (AFDC). But in reality TANF is only a tiny portion of a vast array of federal government social welfare programs designed to fight poverty. In fact, if one considers those programs that are means-tested (and therefore obviously targeted to low-income Americans) and programs whose legislative language specifically classifies them as anti-poverty programs, there are currently 126 separate federal government programs designed to fight poverty. Most welfare programs are means-tested programs that provide aid directly to lowincome persons in the form of cash, food, housing, medical care, and so forth, with eligibility based on the recipients’ income. The remaining programs are either community-targeted programs, which provide aid to communities that are economically distressed or have large numbers of poor people, or categorical programs, which base eligibility for benefits on belonging to a needy or disadvantaged group, such as migrant workers or the homeless. Some welfare programs are well known; some are barely heard of even in Washington. In 2011 the federal government spent roughly $668.2 billion on those 126 pro-

grams.1 That represents an increase of more than $193 billion since Barack Obama became president. This is roughly two and a half times greater than any increase over a similar time frame in U.S. history, and it means an increase in means-tested welfare spending of about 2.4 percent of GDP. If one includes state and local welfare spending, government at all levels will spend more than $952 billion this year to fight poverty.2 To put this in perspective, the defense budget this year, including spending for the wars in Iraq and Afghanistan, totals $685 billion.3 Indeed, federal welfare spending alone totals more than $14,848 for every poor man, woman, and child in this country. For a typical poor family of three, that amounts to more than $44,500. Combined with state and local spending, government spends $20,610 for every poor person in America, or $61,830 per poor family of three. Given that the poverty line for that family is just $18,530, we should have theoretically wiped out poverty in America many times over (see Figure 1). Of course no individual is eligible for every program, and many poor people receive nowhere near this amount of funding.4 And many supposedly anti-poverty programs are poorly targeted, with benefits spilling over to people well above the poverty line. But that is precisely the point—we are spending more than enough money to fight poverty but not spending it in ways that actually reduce poverty.

126 Programs
As detailed in the appendix, the federal government currently funds 126 separate and often overlapping anti-poverty programs. For example, there are 33 housing programs, run by four different cabinet departments, including, strangely, the Department of Energy. There are currently 21 different programs providing food or food-purchasing assistance. These programs are administered by three different federal departments and one

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Figure 1 Poverty Threshold, Federal Welfare Spending, and Total Welfare Spending for a Family of Three (in dollars)

independent agency. There are 8 different health care programs, administered by five separate agencies within the Department of Health and Human Services. And six cabinet departments and five independent agencies oversee 27 cash or general assistance programs. All together, seven different cabinet agencies and six independent agencies administer at least one anti-poverty program. The exact number and composition of these programs fluctuates slightly from year to year, depending on congressional appropriations and presidential priorities. For example, the 2011 federal budget eliminated programs such as the Foster Grandparent Program, the Senior Companion Program, Even Start, and Vista, while creating new ones such as Choice Neighborhood Planning Grants, the Emergency Homeowners Loan

Program, and the Capacity Building for Sustainable Communities Fund. However, the number of federal anti-poverty programs has exceeded 100 for more than a decade. State and local governments provide additional funding for several of these programs and operate a number of programs on their own. Federal spending accounts for roughly two-thirds of welfare funding, with the states—and occasionally localities—accounting for the rest. The single largest welfare program today is Medicaid. Medicaid spending that supports health care for the poor, excluding funding for nursing home or long-term care for the elderly, topped $228 billion in 2011. The Supplemental Nutrition Assistance Program (food stamps) was the second most expensive welfare program, costing taxpayers

Seven different cabinet agencies and six independent agencies administer at least one anti-poverty program.

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At least 106 million Americans receive benefits from one or more of these programs.

nearly $72 billion. Rounding out the top 10 were the Earned Income Tax Credit, Child Tax Credit, Pell Grants, Supplemental Security Income, the State Children’s Health Insurance Program, housing vouchers, and TANF (see Figure 2). At least 106 million Americans receive benefits from one or more of these programs.5 Again, Medicaid tops the list, with roughly 49 million poor Americans receiving benefits from this program (once again excluding the elderly receiving assistance to pay for longterm care and nursing home care).6 Second is food stamps; nearly 41 million Americans, about 15 percent of the population, now receive food stamps, the highest number in U.S. history.7 Looking at the remainder of the 10 most costly programs, all provide benefits to more than 4.5 million Americans (see Figure 3). None of this, of course, includes middleclass entitlements such as Medicare and Social Security, which, while not designed

specifically as anti-poverty programs, nevertheless represent transfer payments from the government. Overall, government payouts, including middle-class entitlements, now account for more than a third of all wages and salaries in the United States.8 Worse, if one includes salaries from government employment, more than half of Americans receive a substantial portion of their income from the government.9 Any way that you look at it, we are rapidly becoming a society where more and more people rely on the government for their support.

More Money, More Poverty
By any measure, U.S. welfare spending has increased dramatically since 1965. In constant dollars, federal spending on welfare and anti-poverty programs has risen from $178 billion to $668 billion, a 375 per-

The Obama administration has increased spending on welfare programs by more than $193 billion.

cent increase in constant 2011 dollars, while total welfare spending—including state and local funds—has risen from $256 billion to $908 billion. Measured as a percentage of GDP, federal spending increased more than fourfold, from just 0.83 percent of GDP to 4.4 percent.10 Total welfare spending nearly tripled, from 2.19 percent of GDP to 6 percent (see Figure 5). And, on a per capita basis, that is per poor person, federal spending has risen by more than 900 percent, from $1,625 to $14,848, while total spending rose by a smaller, but still substantial 651 percent, from $3,032 to $19,743 (see Figure 6).11 Over the last decade the increase has been even more rapid. Federal welfare spending increased significantly under the Bush administration, but President Obama has thrown money at anti-poverty programs at an unprecedented rate. Since taking office, the Obama administration has increased spending on welfare programs by more than $193 billion (see Figure 7).12 These numbers are slightly distorted by the inclusion of Medicaid, where expendi-

tures have increased because of the overall rise in health care costs as well as program expansion. However, even excluding Medicaid, spending on means-tested social welfare programs grew by 26 percent from 1990 to 2008—and much more rapidly since then. Expenditures for every program except TANF increased in real terms.13 The growth of expenditures has been particularly strong for “in-kind” programs, which provide benefits for specific consumption, such as medical care, food, and housing, rather than cash.14 Some of the increase, of course, is clearly due to the recession. Many of these programs are countercyclical, meaning that they automatically expand during economic downturns. However, increases in both participation and spending were greater during this recession than in previous ones. For example, during the 1980–82 recession, enrollment in food stamps increased by only 635,000, and spending rose by just $124 million (in constant 2012 dollars). During the 1990–92 recession and jobless recovery, enrollment increased by 5.2 million, and spending rose by $9.1 billion. During the current recession (over a comparable three-

Over the next 10 years, federal and state governments will spend $250,000 for every American currently living in poverty.

year period), enrollment increased by 12 million people, while spending increased by $30 billion.15 Of course, this recession was deeper than those previous ones—unemployment peaked at 9.8 percent during this recession versus 7.8 percent in 1992.16 But the dramatically larger increase also suggests that part of the program’s growth is due to conscious policy choices by this administration to ease eligibility rules and expand caseloads. For example, income limits for eligibility have risen twice as fast as inflation since 2007 and are now roughly 10 percent higher than they were when Obama took office.17 Moreover, the definition of “categorical eligibility” for the Supplemental Nutrition Assistance Program was expanded substantially in the 2008 farm bill and led to the asset test for eligibility being relaxed, as values of vehicles, retirement accounts, and education savings accounts began to be excluded from the test. Categorical eligibility allows states to declare large numbers of families eligible for food stamps without actually going through the individual eligibility process. Coupled with the fact that Congress allows states to use this determination for families with incomes up to 200 percent of the poverty line, the combination of the two rules allows large numbers of nonpoor persons to qualify. 18 The same holds true for other welfare programs. For example, the stimulus bill included a provision that created a new “emergency fund” to help states pay for added welfare recipients, with the federal government footing 80 percent of the cost for the new “clients.”19 This was an important change because it undid many of the incentives contained in the 1996 Clinton welfare reform, which helped states to reduce welfare rolls. Under the new rules, states that succeed in getting people off welfare lose the opportunity for increased federal funding. And states that make it easier to stay on welfare (by, say, raising the time limit from two years to five) are rewarded with more taxpayer cash. The bill even let states with rising wel-

fare rolls continue to collect their “case-load reduction” bonuses.20 According to Obama administration projections, combined federal and state welfare spending will not drop significantly once the economy fully recovers. As we have seen, welfare spending has continued to increase.21 By 2014 this spending is likely to equal $1 trillion per year and will total $10.3 trillion over the next 10 years.22 According to these projections, over the next 10 years, federal and state governments will spend $250,000 for every American currently living in poverty, or $1 million for every poor family of four.23 And that does not include spending under the Patient Protection and Affordable Care Act, which will dramatically increase the number of low-income Americans participating in Medicaid.24

Little “Bang for the Buck”
All this spending has not bought an appreciable reduction in poverty. As Figure 8 makes clear, the poverty rate has remained relatively constant since 1965, despite rising welfare spending. In fact, the only appreciable decline occurred in the 1990s, a time of state experimentation with tightening welfare eligibility, culminating in the passage of national welfare reform (the Personal Responsibility and Work Responsibility Act of 1996). And, since 2006, poverty rates have risen despite a massive increase in spending.25 Previous analysis of this sort was criticized, with some justification, because traditional poverty measures do not account for the value of noncash welfare benefits. Nor do they account for costs of taxes or employment costs, or the different costs of living in different parts of the country. However, the Census Bureau has now released a new alternative poverty measure which does take both those benefits and expenses into account. This new measure suggests that the real poverty level in the United States could actually be higher than under the traditional measures by roughly 16 percent.26

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Figure 8 Poverty Rate vs. Welfare Spending 1976–2011

Source: Based on Author’s calculations, poverty rates from U.S. Census Bureau, http://www.census.gov/hhes/ www/poverty/data/historical/people.html, and state level welfare spending from Congressional Research Service, “Cash and Noncash Benefits for Persons with Limited Income: Eligibility Rules, Recipient and Expenditure Data.

Of course, this does not mean that antipoverty spending has had no impact. Certainly it could be argued that, without such spending, poverty levels would be even higher. Indeed, the alternative poverty measure suggests that without welfare benefits, poverty rates could exceed 18 percent. However, most of that difference is attributable to the Earned Income Tax Credit. Other programs have only a marginal impact on poverty rates.27 There is also some evidence that even if anti-poverty spending failed to lift many people out of poverty, it did reduce the severity of that poverty. According to the alternative poverty measure, for instance, taking into account the full range of welfare benefits received reduces the number of Americans living in extreme poverty—that is below 50 percent of the poverty level—from 6.2 percent to 5.4 percent.28 These people remained poor, but less poor than before.

Still, given the level of anti-poverty spending, both in the aggregate and on a per capita basis, this amounts to surprisingly little “bang for the buck.” Moreover, other studies suggest that the impact of anti-poverty programs on reducing both poverty and deep poverty was actually greater before recent increases in welfare spending. For example, anti-poverty efforts were more effective among single-parent families and the unemployed, groups most at risk for deep poverty, prior to 1985 than in recent years, despite increasing expenditures.29 Clearly we are spending more than enough money to have significantly reduced poverty. Yet we haven’t. This should suggest that we are doing something wrong. This is not just a question of the inefficiency of government bureaucracies, although the multiplicity of programs and overlapping jurisdictions surely means that there is a lack of accountability within the system.

Clearly we are spending more than enough money to have significantly reduced poverty. Yet we haven’t.

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The concept behind how we fight poverty is wrong.

In addition, whatever the intention behind government programs, they are soon captured by special interests. The nature of government is such that programs are almost always implemented in a way to benefit those with a vested interest in them rather than to actually achieve the programs’ stated goals. As economists Dwight Lee and Richard McKenzie among others point out, the political power necessary to transfer income to the poor is power that can be used to transfer income to the nonpoor, and the nonpoor are usually better organized politically and more capable of using political power to achieve their purposes.30 Among the nonpoor with a vital interest in antipoverty programs are social workers and government employees who administer the programs and business people, such as landlords and physicians, who are paid to provide services to the poor. Thus, anti-poverty programs are usually more concerned with protecting the prerogatives of the bureaucracy than with actually fighting poverty. But more important, the concept behind how we fight poverty is wrong. The vast majority of current programs are focused on making poverty more comfortable—giving poor people more food, better shelter, health care, and so forth—rather than giving people the tools that will help them escape poverty. And we actually have a pretty solid idea of the keys to getting out of and staying out of poverty: (1) finish school; (2) do not get pregnant outside marriage; and (3) get a job, any job, and stick with it. Consider: High school dropouts are roughly three and a half times more likely to end up in poverty than those who complete at least a high school education.31 If they do find jobs, their wages are likely to be low. Wages for high school dropouts have declined (in inflation-adjusted terms) by 17.5 percent over the past 30 years.32 At the same time, children growing up in single parent families are four times more likely to be poor than children growing up in two-parent families.33 Roughly 63 percent of all poor children reside in single-parent families.34

And only 2.6 percent of full-time workers are poor. The “working poor” are a small minority of the poor population. Even part-time work makes a significant difference. Only 15 percent of part-time workers are poor, compared with 23.9 percent of adults who do not work.35 To jobs, education, and marriage, we can add one more important stepping stone on the road out of poverty—savings and the accumulation of wealth. As Michael Sherraden of Washington University in St. Louis has noted, “for the vast majority of households, the pathway out of poverty is not through consumption, but through saving and accumulation.”36 Yet with the exception of some education programs such as Pell grants and some job training programs, little of our current welfare state encourages—and much discourages—the behavior and skills that would help them stay in school, avoid unmarried pregnancies, find a job, and save money. All of this suggests that it is far past time to reevaluate our current approach to fighting poverty. Although a comprehensive alternative to our current welfare state is beyond the scope of this paper, it should be clear that we need to focus less on making poverty more comfortable and more on creating the prosperity that will get people out of poverty.

Conclusion
The American welfare state is much larger than commonly believed. The federal government alone currently funds and operates 126 different welfare or anti-poverty programs, spending more than $668 billion per year. State and local governments provide additional funding for several of these programs and also operate a number of programs on their own, adding another $284 billion per year. That means that, at all levels, government is spending more than $952 billion per year, just short of the trillion dollar mark. Yet for all this spending, we have made remarkably little progress in reducing pov-

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erty. Indeed, poverty rates have risen in recent years even as spending on anti-poverty programs has increased. All of this suggests that the answer to poverty lies not in the expansion of the welfare state, but in building the habits and creating the conditions that lead to prosperity. It would make sense therefore to shift our anti-poverty efforts from government programs that simply provide money or goods and services to those who are living in poverty to efforts to create the conditions and incentives that will make it easier for people to escape poverty. Poverty, after all, is the natural condition of man. Indeed, throughout most of human history, man has existed in the most meager of conditions. Prosperity, on the other hand, is something that is created. And we know that the best way to create wealth is not through government action, but through the power of the free market. Appendix Federal Welfare Programs
Name Medicaid37 Supplemental Nutrition Assistance Program (SNAP)38 Earned Income Tax Credit (Refundable Portion)39 Supplemental Security Income40 Federal Pell Grants41 Temporary Assistance for Needy Families42 Section 8 Housing Choice Vouchers43 Very Low to Moderate Income Housing Loans- Sec. 50244 Title 1 Grants to Local Education Agencies45 Children’s Health Insurance Program46 National School Lunch Program47 Adjustable Rate Mortgages48

That means that if we wish to fight poverty, we should end those government policies—high taxes and regulatory excess—that inhibit growth and job creation. We should protect capital investment and give people the opportunity to start new businesses. We should reform our failed government school system to encourage competition and choice. We should encourage the poor to save and invest. We all seek a society where every American can reach his or her full potential, where as few people as possible live in poverty, and where no one must go without the basic necessities of life. More importantly we seek a society in which every person can live a fulfilled and actualized life. Shouldn’t we judge the success of our efforts to end poverty not by how much charity we provide to the poor but by how few people need such charity? By that measure, our current $1 trillion War on Poverty is a failure.

The federal government alone currently funds and operates 126 different welfare or anti-poverty programs.

Name Investing in Innovation Fund (I3)98 TRIO Talent Search99 Youthbuild100 Demolition and Revitalization of Severely Distressed Public Housing101 WIC Grants to States102 Healthy Start Initiative103 Food Distribution Program on Indian Reservations104 U.S. Refugee Admissions Program105 Appalachian Area Development106 Education for Homeless Children and Youth107 Indian Social Services Welfare Assistance108 Projects for Assistance in the Transition from Homelessness109 Farm Labor Housing Loans and Grants110 Indian Community Development Block Grant Program111 Indian and Native American Training Grant Program112 Very Low Income Housing Repair Loans and Grants113 Prevention and Intervention Programs for Children and Youths Who Are Neglected, Delinquent, or at Risk114 Section 4 Capacity Building for Community Development and Affordable Housing115 High School Graduation Initiative116 TRIO Educational Opportunity Centers117 WIA Pilots, Demonstrations and Research Projects118 TRIO McNair Post-Baccalaureate Achievement119 Indian Health Services (Urban )120 Adoption Incentive Payments121

expanding-the-failed-war-on-poverty-obamas2011-budget-increases-welfare-spending-to-his toric-levels. 3. U.S. Department of Defense, “Fiscal Year 2012 Budget Request,” Figure 1.1, http://comp troller.defense.gov/defbudget/fy2012/FY2012_ Budget_Request_Overview_Book.pdf. 4. Its worth noting, however, that a 1995 Cato Institute study found that a family of three could be eligible for benefits totaling as much as $36,000 per year, depending on the state. Michael Tanner, Stephen Moore, and David Hartman, “The Work vs. Welfare Trade-Off: An Analysis of the Total

The American Welfare State How We Spend Nearly $1 Trillion a Year Fighting Poverty--And Fail, Cato Policy Analysis No. 694

Description

On January 8, 1964, President Lyndon B. Johnson delivered a State of the Union address to Congress in which he declared an "unconditional war on poverty in America." At the time, the poverty rate i...

On January 8, 1964, President Lyndon B. Johnson delivered a State of the Union address to Congress in which he declared an "unconditional war on poverty in America." At the time, the poverty rate in America was around 19 percent and falling rapidly. This year, it is reported that the poverty rate is expected to be roughly 15.1 percent and climbing. Between then and now, the federal government spent roughly $12 trillion fighting poverty, and state and local governments added another $3 trillion. Yet the poverty rate never fell below 10.5 percent and is now at the highest level in nearly a decade. Clearly, we have been doing something wrong.

When most Americans think of welfare, they think of the cash benefit program known as Temporary Assistance to Needy Families (TANF), formerly known as Aid to Families with Dependent Children (AFDC). But in reality TANF is only a tiny portion of a vast array of federal government social welfare programs designed to fight poverty. In fact, if one considers those programs that are means-tested (and therefore obviously targeted to low-income Americans) and programs whose legislative language specifically classifies them as anti-poverty programs, there are currently 126 separate federal government programs designed to fight poverty.